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Deflation
Deflation
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Major Deflationary Signal???

It is 11 pm and I just came across this in the past hour, I hope I haven’t made a glaring error. The ETF TIP tracks inflation protected securities. As such it normally follows 5 and 10 year break even rates closely, and it has done all year until January 24th when it diverged. First it diverged by staying flat while inflation expectations continued to rise, but then around Feb 11th it started to fall while expectations still rose, dropping from ~128 to under 125 (and after hours today it fell to 124.50). This is odd on its own, but starting at the same time as this divergence the Fed picked up its purchasing program, from the July low the balance sheet expanded by ~$40 billion a month, but from Jan 24th to Feb 24th it jumped $185 billion.

If I haven’t missed something serious the most direct interpretation would be that the Fed has recently started buying a large number of inflation protected bonds to drive up expectations while the market has been selling them, and as long as the Fed isn’t buying the TIP ETF directly this is causing the divergence. The logical (in terms of Fed logic) reason to do this is because the short end of the curve is near zero and the Fed has resisted negative rates, but one way to stimulate (again according to Fed logic) would be to push inflation expectations up which lowers the real return of those bonds that are sitting... (More)

Who thinks we need a follow-up with Lacy Hunt and Kirl Sokoloff to see if Lacy thinks that the market is right or wrong ... spending will finally be inflationary?

Trading Outlook and Catalysts

Hey guys, I just did a really fun video with @Aahan Menon on the current economic outlook and how to trade it. More importantly, we talked about trading the catalyst of the TGA emptying over a trillion dollars out of their account! You need to know this catalyst because it will be one of the major driving factors as we move through Q2. 

The goal of this video is two-fold: Educationally explaining where we are in the economy cyclically and also how liquidity is currently functioning in this market regime. I have gleaned so much value from Aahan's research and conversations with him. Some of the best trades I have put on, stem from reading his research (https://prometheusresearch.substack.com/). I only plug him because the research is exceptional and free! 

Several of the topics we discussed surround @Raoul Pal discussion about liquidity and if we are really in a bubble. 

Enjoy!

https://youtu.be/w9GxOFlqCoU

 

Marc Jackson
Electronics Engineer

Inflation?

I spent some time thinking about Russell Napiers inflation argument. It assumes that government backed loans will continue ad infinitum and I can't see this happening. My company took out a 'bounce back business loan' and the money has already been spent. Will the (UK) government offer more loans? Maybe but I suspect my business won't be eligable until the previous loan is paid off, 5 years. Maybe they'll write off the initial loan (debt jubilee), unlikely.

I am expecting the UK government to announce government backed personal loans at some point and maybe this will lead to inflation but surely these loans give an individual a short term spending spree and more debt?

So, as I see it, we may get bursts of inflation but nothing long lasting.

As always, would love to hear your thoughts.